Weak supply keeping prices high
Weaker milk production in the Northern Hemisphere is keeping dairy prices high.
Last week’s GDT price rise pushed flagship whole milk powder prices to a four-year high; prices for skim milk powder, butter and anhydrous milk fat also jumped sharply.
Following the latest GDT result, Westpac lifted its forecast milk price for the season to $7.50/kgMS. Fonterra’s last price review in December settled on a price range of $6.70 to $7.30/kgMS.
Fonterra chief executive Miles Hurrell told Rural News that Westpac’s move was “interesting”.
He says Fonterra was monitoring every GDT event.
“We have first-hand knowledge; we know what we have on our books, what we’ve sold and at what prices,” he says.
“’We have the most accurate data which we use to make our decisions on the farmgate milk payout.”
Under DIRA, Fonterra is required to update its forecast milk payout in early March and Hurrell says the co-op could come out before then if warranted.
Westpac senior agri economist Nathan Penny says the lift in its forecast payout comes on the back of surging global dairy prices, particularly at the start of this year.
“Since early November, overall dairy prices have jumped 17.2%, with over half of the lift occurring since the start of the year,” Penny says.
ASB economist Nat Keall says increasingly the risks skewed towards a higher farmgate milk price than its current $7/kgMS forecast.
“Indeed, a farmgate price towards the upper end of Fonterra’s forecast range is very much possibility. We’ll be closely examining the next auction with a view towards adjusting our forecast,” Keall says.
Last week’s GDT auction saw whole milk powder prices rise 2.2% to US$3,380/metric tonne. Anhydrous milk fat prices rose a whopping 17% to US$5,398/MT.
Butter prices rose 4.6% to US$4,735/MT while skim milk powder soared 7% to US$3,243/MT.
Hurrell says it was pleasing to see price movements at the end of last year continue into 2021.
Strong consumer demand for dairy, mainly from China, is pushing dairy prices up.
Hurrell says demand is also picking in some South East Asian and Middle Eastern markets but last week’s result “was very much a China story”.
He says Covid continues to impact markets around the world but demand from China reflects how that country was ahead of the pandemic.
The rollout of vaccines around the world is also helping dairy demand recover in some other key markets.
Penny agrees that Chinese demand is underpinning the price surge.
“China largely has Covid under control and its economy has rebounded strongly. In fact, the Chinese economy actually grew over 2020, the only major economy to do so,” he says.
“Dairy markets have put Covid well and truly in the rear-view mirror. Whole milk powder (WMP) prices are now at their highest level since December 2016.”
Penny expects dairy prices to rise further in the coming months.
“From here, we expect the price momentum has further to run. Global dairy supply takes time respond to price lifts. Ultimately though, when supply does respond, we expect prices to moderate. But that is a story largely for next season”.
